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IG - Afternoon thoughts January 10, 2012

FTSE 6103 +4
DAX 7733 +13
CAC 3720 +3
IBEX 8634 +28
DOW 13415 +24
NAS 2734 +6
S&P 1464 +3

Oil 93.45
Gold 1657

Regional markets are mostly firmer on the back of China’s trade balance numbers, which smashed expectations. China posted a trade surplus of $31.6 billion (versus a consensus of $20.1 billion) with exports jumping 14.1% and imports up 6%. Equities have gained ground on the back of the data with the Nikkei rising 0.8%, the Hang Seng climbing 1% and the Shanghai Composite advancing 0.7%. USD/JPY is back above 88 and is helping to underpin gains in the Nikkei ahead of Japan’s current account data tomorrow. Should this data miss expectations then we are likely to see further yen weakness. In the risk currency space, AUD/USD has been a standout after jumping from 1.05 to an Asian trade high of 1.0554. The pair had been subdued earlier after local building approvals and retail sales data disappointed. However, with China continuing to show strong signs of stabilisation, AUD/USD is in good stead. The pair had been stuck in a range between 1.047 and 1.052 all week and this move finally saw it break out. As a result, the 1.052 region will now be acting as near-term support. The other risk currencies haven’t responded quite as profoundly, with EUR/USD and GBP/USD remaining relatively subdued ahead of central bank meetings later today.

Investors will be on central bank watch later today with the BOE and ECB set to meet. Ahead of the European open, we are calling the major bourses flat to mildly firmer. Subdued price action in GBP/USD and EUR/USD suggests market participants are exercising caution ahead of the central bank meetings. Both banks are expected to leave the current policy settings unchanged. The ECB press conference will carry more weight with Mario Draghi set to hit the wires. Mr Draghi might give hints on what to expect from the OMT, potential for negative rates and perhaps the growth outlook following the recent reforms. US markets are pointing to a firmer start with unemployment claims data in focus. Fed members George and Bullard will also be on the wires and might make some comments regarding QE.

The local market has added 0.3% 4721 after materials swung into positive territory on the back of China’s data. Fortescue Metals has surged 2.5%, Alumina is 3.4% higher and BHP Billiton has edged up 0.2%. AWC was upgraded to outperform (from neutral) by Credit Suisse today. The stock has been having a good run on the back of the Alcoa result. The energy sector is underperforming despite Linc Energy shares rallying over 11%. Gold miners have continued to lag as the precious metal fails to shake off recent weakness. Newcrest Mining has declined 1.7% and Medusa Mining is down 1.4%. The financials have held up well with all four big banks modestly firmer. Surprisingly defensive sectors continue to lead the gains despite all the developments on the risk front. Consumer staples are having a good run with Wesfarmers rising 1.1% and Coca-Cola Amatil up 1%.


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